The concept of an inflation-linked “stablecoin” has been trialed before, but time is yet to prove whether it is working as intended.
Blockchain tech firm Laguna Labs has launched a testnet for its in-development “flatcoin” — a spin-off of stablecoin tokens — pegged to the cost of living rather than a fiat currency or a commodity.
In an Oct. 24 announcement, Laguna Labs said that the Nuon flatcoin is unlike tokens tied to fiat currencies, such as the United States dollar, as it is pegged to the cost of living via “daily unbiased, authentic, and on-chain inflation data.”
The firm said the idea is inspired by discussions and Twitter threads from big players in the space, such as Coinbase CEO Brian Armstrong, ex-Coinbase CTO Balaji S. Srinivasan and Ethereum co-founder Vitalik Buterin, who all call for alternative ways to peg an asset so that it maintains its purchasing power over time.
However, while the concept of an inflation-linked crypto token is not new, it remains relatively untested.
In April, Frax Finance launched a consumer price index-tracking (CPI) stablecoin called the Frax Price Index (FPI) that utilizes oracle data from ChainLink.
Launching at around $1.02, the price hit an all-time high of $1.18 on July 19 but is down 10.6% since then to $1.05. Given the asset is less than a year old, it is hard to judge its success in beating out inflation rates until more time has passed.
The Volt Protocol (VALT) token also follows the CPI-tracking route, but its price history is hard to come by as platforms such as CoinMarketCap and CoinGecko are not actively tracking the asset. It is not listed on any major exchanges like Binance and Coinbase.
There is also the aptly named Inflation Hedging Coin (IHC), launched in October 2021, which utilizes a burning mechanism “based on the annual United States inflation data” and monthly CPI rate to determine the asset’s burn rate and, in theory, increase its value over time.
However, a person snapping up IHC a year ago will see the value of their holdings fall as much as 96.4% as of today, according to data from CoinGecko, with IHC priced at $0.00009529 at the time of writing.
The Nuon white paper states that it utilizes an independent inflation index oracle to calculate the Nuon peg daily and uses “over-collateralization and arbitrage to maintain the peg while offsetting inflation.”
It also claims that the asset’s over-collateralization will stop it from falling from its peg. However, it is unclear how well that theory holds up if the value of the collateralized assets were to tank significantly.
Details are sparse on the testnet, but the firm states that people can now use the testnet to try out the Nuon flatcoin’s minting mechanism.
Related: UK inflation rate hits 10.1%, British Bitcoin community responds
Annual U.S. Inflation rates have surged dramatically since the beginning of the COVID-19 pandemic, going from 1.4% to around 8.2% in 2022 according to U.S. Inflation Calculator.
As such, the purchasing power of the USD has taken a significant hit with the general price of goods and services continuing to increase.
Crypto, and particularly stablecoins have also been an important tool for citizens in countries dealing with significant inflation and economic trouble.
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